Question

A $1M investment in 90 day commercial paper has a 3% discount yield, what is its bond equivalent yield?

A Commercial Paper is sold at discount not paying coupon interest. Bond equivalent yield=(                   )

Answer 1

Face Value of commercial paper = $1000,000

Discount Yield = [(Face Value - Purchase Price)/Purchase Price]*360/No of days

0.03 = [(1000,000 - Purchase Price)/Purchase Price]*360/90

0.0075 = [(1000,000 - Purchase Price)/Purchase Price]

0.0075*Purchase Price = 1000,000 - Purchase Price

1.0075*Purchase Price = 1000,000

Purcahse Price = $992,558.53

Now, Calculating Bond equivalent Yield:-

Bond equivalent Yield = [(Face Value - Purchase Price)/Purchase Price]*365/No of days

= [(1000,000 - 992,558.53)/992,558.53]*365/90

= 3.04%

So, its bond equivalent yield is 3.04%

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